Life‐Cycle Patterns of Interest‐Rate Mark‐Ups in Small‐Firm Finance

29 Pages Posted: 16 May 2012

See all articles by Moshe Kim

Moshe Kim

University of Haifa - Department of Economics

Eirik Gaard Kristiansen

affiliation not provided to SSRN

Bent Vale

Norges Bank (Central bank of Norway)

Date Written: June 2012

Abstract

We derive empirical implications from a theoretical model of bank–borrower relationships. The interest‐rate mark‐ups of banks are predicted to follow a life‐cycle pattern over the age of the borrowing firms. Because of endogenous bank monitoring by competing banks, borrowing firms initially face a low mark‐up, and thereafter an increasing mark‐up as a result of informational lock‐in, until it falls for older firms when the lock‐in is resolved. By applying a large sample of predominantly small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric‐information problems have a more pronounced life‐cycle pattern of interest‐rate mark‐ups. Additionally, we examine the effects of concentrated banking markets on interest‐rate mark‐ups. The results indicate that the life cycle of mark‐ups is mainly driven by asymmetric‐information problems and not by concentration. However, we find evidence that bank market concentration matters for older firms†

Keywords: Asymmetric information, banking, competition, loan‐pricing, lock‐in

JEL Classification: G21, L15

Suggested Citation

Kim, Moshe and Kristiansen, Eirik Gaard and Vale, Bent, Life‐Cycle Patterns of Interest‐Rate Mark‐Ups in Small‐Firm Finance (June 2012). The Scandinavian Journal of Economics, Vol. 114, Issue 2, pp. 629-657, 2012, Available at SSRN: https://ssrn.com/abstract=2060771 or http://dx.doi.org/10.1111/j.1467-9442.2011.01688.x

Moshe Kim

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel
(972) 4 8240115 (Phone)
(972)4-8240059 (Fax)

Eirik Gaard Kristiansen

affiliation not provided to SSRN

No Address Available

Bent Vale

Norges Bank (Central bank of Norway) ( email )

Bankplassen 2
P.O. Box 1179
Oslo, N-0107
Norway
+47 22 31 66 74 (Phone)
+47 22 42 40 62 (Fax)

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